Today's Market
by Dr Invest

If you are wondering... NOTHING HAS CHANGED. Financial advisers, brokers, bankers, and the sort, all want you to know that the market is doing "FANTASTIC". They remind you of how much stocks have gone up in the past two years, beating the drum of "staying in the market and investing more". Our president reminds us how wonderful the economy is under his watch, with unemployment at an all-time low. Daily, central bankers remind us that the future is remarkably bright. Laguarde of the International Monetary Fund spoke to central bankers last week, declaring "new age" in which Central Banks can resolve almost any financial crisis if they work together. This week Laguarde is saying that there will be a cut in the institution's global growth forecasts and that risks in the U.S. because of weak investment as the rebound accelerates.

Rebound? What rebound? The Federal Reserve's Yellen, just announced a cut to the Fed's original projected GDP for 2014. If you are confused, so am I. The Economic Cycle Research Institute said that we entered a recession in 2012. Though stocks have ignited, the GDP has averaged less that 2% annually. By the Fed's own statement, they have said that 2% is STALL SPEED for a recession. NOTHING HAS CHANGED. People are risking their money and their future on the advice of financial advisers they trust, as the market nears the moment in which take a new plunge.

Investor sentiment has never been higher. On paper, investments seem to have never been more productive. Financial advisers, brokers, and bankers are telling customers, "You don't want to miss out on the rally" and "This bull run still has legs."   What you are hearing are lies. Like a man who has cancer, but not yet symptoms, he feels ready for game; while all along the cancer is slowly eating away at his health.

As I've said so many times, if you removed the punch bowl of stimulus from the markets, they would immediately collapse. This isn't the sign of strength, but rather weakness. Who, excepting the ignorant, would invest in a market like this?

HUSSMAN'S TAKE

HUSSMAN.COM  Last week, the Bank for International Settlements, which acts as the central bank to central banks, issued its annual report. It is about the most insightful warning that one is likely to see from the central banking system, even if the Federal Reserve, ECB and other individual central banks are the ones being warned.

 “Financial markets have been exuberant over the past year, at least in advanced economies, dancing mainly to the tune of central bank decisions. Volatility in equity, fixed income and foreign exchange markets has sagged to historical lows. Obviously, market participants are pricing in hardly any risks. In advanced economies, a powerful and pervasive search for yield has gathered pace and credit spreads have narrowed. The euro area periphery has been no exception. Equity markets have pushed higher. To be sure, in emerging market economies the ride has been much rougher. At the first hint in May last year that the Federal Reserve might normalize its policy, emerging markets reeled, as did their exchange rates and asset prices. Similar tensions resurfaced in January, this time driven more by a change in sentiment about conditions in emerging market economies themselves. But market sentiment has since improved in response to decisive policy measures and a renewed search for yield. Overall, it is hard to avoid the sense of a puzzling disconnect between the markets’ buoyancy and underlying economic developments globally.

“In the countries that have been experiencing outsize financial booms, the risk is that these will turn to bust and possibly inflict financial distress. Based on leading indicators that have proved useful in the past, such as the behaviour of credit and property prices, the signs are worrying.

“Term and risk premia can only be compressed up to a point, and in recent years they have already reached or approached historical lows. The risk is that, over time, monetary policy loses traction while its side effects proliferate. These side effects are well known (see previous Annual Reports). Policy may help postpone balance sheet adjustments, by encouraging the evergreening of bad debts, for instance. It may actually damage the profitability and financial strength of institutions, by compressing interest margins. It may favour the wrong forms of risk-taking. And it can generate unwelcome spillovers to other economies, particularly when financial cycles are out of synch. Tellingly, growth has disappointed even as financial markets have roared: the transmission chain seems to be badly impaired. The failure to boost investment despite extremely accommodative financial conditions is a case in point.

“Good policy is less a question of seeking to pump up growth at all costs than of removing the obstacles that hold it back. When policy responses fail to take a long-term perspective, they run the risk of addressing the immediate problem at the cost of creating a bigger one down the road. Debt accumulation over successive business and financial cycles becomes the decisive factor.

“In contrast to what is often argued, central banks need to pay special attention to the risks of exiting too late and too gradually. This reflects the economic considerations just outlined: the balance of benefits and costs deteriorates as exceptionally accommodative conditions stay in place. And political economy concerns also play a key role. As past experience indicates, huge financial and political economy pressures will be pushing to delay and stretch out the exit.

“The current weakness of aggregate demand may suggest the need for further monetary stimulus or for easing the pace of fiscal consolidation. However, these policies are likely to be either ineffective in current circumstances or unsustainable: taking a long-term perspective, they may simply succeed in bringing forward spending from the future rather than increasing its overall amount over the long run, while leading to a further rise in public and private debt. Instead, the only way to boost demand in a sustainable manner is to raise the production capacity of the economy by removing barriers to productive investment and the reallocation of resources. This is even more important in the face of declining productivity growth.

“The benefits of unusually easy monetary policies may appear quite tangible, especially if judged by the response of financial markets; the costs, unfortunately, will become apparent only over time and with hindsight. This has happened often enough in the past. And regardless of central banks’ communication efforts, the exit is unlikely to be smooth. Seeking to prepare markets by being clear about intentions may inadvertently result in participants taking more assurance than the central bank wishes to convey. This can encourage further risk-taking, sowing the seeds of an even sharper reaction. Moreover, even if the central bank becomes aware of the forces at work, it may be boxed in, for fear of precipitating exactly the sharp adjustment it is seeking to avoid. A vicious circle can develop. In the end, it may be markets that react first, if participants start to see central banks as being behind the curve. This, too, suggests that special attention needs to be paid to the risks of delaying the exit. Market jitters should be no reason to slow down the process.

“The temptation to postpone adjustment can prove irresistible, especially when times are good and financial booms sprinkle the fairy dust of illusory riches. The consequence is a growth model that relies too much on debt, both private and public, and which over time sows the seeds of its own demise. More generally, asymmetrical policies over successive business and financial cycles can impart a serious bias over time and run the risk of entrenching instability in the economy. Policy does not lean against the booms but eases aggressively and persistently during busts. This induces a downward bias in interest rates and an upward bias in debt levels, which in turn makes it hard to raise rates without damaging the economy – a debt trap. Systemic financial crises do not become less frequent or intense, private and public debts continue to grow, the economy fails to climb onto a stronger sustainable path, and monetary and fiscal policies run out of ammunition. Over time, policies lose their effectiveness and may end up fostering the very conditions they seek to prevent. In this context, economists speak of ‘time inconsistency’: taken in isolation, policy steps may look compelling but, as a sequence, they lead policymakers astray.

“The risks of failing to act should not be underestimated.”

With stocks at an all-time-high and overly rich valuations, the investor is placed at higher and higher risk to achieve the same returns. I have chosen to get out of the market, expecting to be rewarded with no losses and rich returns after reinvesting when the market cycle returns to its lows.

If you have to stay in the market to continue getting monthly returns, then you are to be most pitied. You can ask your broker / financial adviser to protect your investment in a serious down turn. He should know how.

Note: the above information is for entertainment purposes only and should never be used as investment advice.